Arb-Med: Arbitrator Does Not Enjoy Immunity After Alleged Withdrawal (Web)

July 27, 2006

In, Morgan Phillips, Inc. v. JAMS/ENDISPUTE, et al., 2006 Cal. App. LEXIS 911 (Cal. Ct. App. 2006), California’s Second District Court of Appeal held that arbitral immunity would not protect the arbitrator from suit when the arbitrator withdraws without justification from an arbitration proceeding, without giving an arbitral award, after evidence and argument have been offered.

Morgan Phillips Inc., a specialty bedding retailer, contracted with two suppliers for mattresses and box springs. After finding that the supplier’s products had not been manufactured as specified, Morgan Phillips commenced a mediation under the auspices of JAMS.

Mediator John B. Bates assisted the parties in reaching a settlement through mediation. The “’stipulation for settlement’ provided that ‘[d]isputes regarding this matter will be submitted to [Bates] for binding resolution.’”

Two years later, Morgan Phillips, again dissatisfied with the supplier’s products, relied on the stipulation for settlement when he entered into a contract with JAMS and Bates under which the parties agreed to conduct a “binding arbitration.” According to Morgan Phillips, after hearing the evidence, Bates separated the parties and engaged in shuttle settlement efforts. When they failed, he announced that he would engage in further attempts at mediation if the parties so desired but refused to render an arbitration award.

Morgan Phillips commenced suit against arbitrator Bates and JAMS, alleging eight causes of action in its first amended complaint.

Bates and JAMS demurred to Morgan Phillips’ first amended complaint on several grounds and the trial court, applying the doctrine of arbitral immunity, sustained the demurrer to the following three actions: breach of contract, negligent breach of the duty to provide binding arbitration services and a representative action for unfair competition and false advertising (this last cause of action was only brought against JAMS).

Morgan Phillips contended that Bates knew that due to the breach of contract, Morgan Phillips was suffering financially and would be unable to continue doing business if the situation wasn’t resolved quickly, so he withdrew in order to coerce a settlement.

In its opinion dated June 30th, the California Court of Appeal relied on California’s common law exception to arbitral immunity outlined in Baar v. Tigerman, 140 Cal. App. 3d 979(1983). In Baar, the arbitrator also failed to make an award, and the court concluded that “immunity does not apply to the arbitrator’s breach of contract by failing to make any decision at all.”

There was a deadline for the award in the contract at issue in Baar, compelling the court to state that “’[w]hile we must protect an arbitrator acting in a quasi-judicial capacity, we must also uphold the contractual obligations of an arbitrator to the parties involved.’”

JAMS and Bates argued that the doctrine of arbitral immunity protects actions taken by the arbitrator while he is acting in his or her quasi-judicial function, except for “complete nonperformance,” and that Bates’ withdrawal was within his quasi-judicial capacity.

However, the Appeals Court ruled that by withdrawing before he gave the award, Bates could have breached his contractual duty to conduct a binding arbitration. The court ruled that such conduct effectively constituted “complete nonperformance,” and was therefore not “’sufficiently associated with the adjudicative phase of the arbitration to justify immunity.’”

In reversing the trial court’s decision to bar Morgan Phillips’ claims, Associate Justice Thomas L. Willhite, Jr. notes that although arbitral immunity does protect functions that are “’integrally related to the arbitral process[,]’” it does not protect conduct that results in the complete breakdown of that process altogether.

The court then notes, however, that it is ruling on a demurrer, and makes no ruling on whether the withdrawal could be justified for a stated ethical reason, such as substantial doubt to be fair. At the demurrer stage the court simply accepted Morgan Phillips Inc.’s allegations as true, including the claim that Bates did not give any reason for his withdrawal.

The Court also declined to make an evidentiary ruling as to Bates/JAMS’ argument that California’s mediation confidentiality privilege barred them from mounting a defense.